Wednesday, October 12, 2011

ND Oil Boom = Housing Boom = Rent Control?

The oil boom in North Dakota is fueling a housing boom, which is putting upward pressure on rents in the oil-rich Western parts of the state. The Minot Daily News is reporting that monthly rents on the apartments at one local complex recently more than doubled from $422 to $900 for a 1-bedroom unit, from $485 to $1,100 for a 2-bedroom unit and from $541 to $1,300 for a 3-bedroom unit.

The steep rental increases are causing some Minot residents and local politicians to voice claims of "criminal" price gouging, with some even advocating rent control laws to prevent or limit rent increases. Based on 200 years of economic theory and empirical evidence from around the world over the last several hundred years, rent control laws in the Bakken area of North Dakota would worsen the housing problems there, lead to chronic housing shortages and a deterioration in the quality of housing, and would create huge disincentives to build the new apartments that are so desperately needed. Not a good idea.

The only choices for North Dakota rental units are: a) market prices that accurately reflect the underlying market forces of supply, and transmit accurate and truthful information about the relative scarcity of rental housing, or b) artificially low rental prices enforced by government edict that do not reflect real market conditions and transmit inaccurate and untruthful information about the relative scarcity of rental housing.

With truthful but high market prices for rental housing, all of the appropriate and desirable behaviors are encouraged, e.g. a) reduced demand and conservation of rental housing space by tenants, and b) increased supply of rental housing by developers and builders, and a market-clearing equilibrium outcome where demand and supply for rental housing are balanced. With low, but untruthful and artificial rent-controlled prices, we would expect exactly the opposite - inappropriate and undesirable behaviors in the form of: a) increased demand and little conservation of rental housing space by renters, and b) decreased supply of future rental housing by producers, and a resulting guaranteed housing shortage characterized by excess demand.

23 Comments:

The steep rental increases are causing some Minot residents and local politicians to voice claims of "criminal" price gouging, with some even advocating rent control laws to prevent or limit rent increases.

They're correct, and that should happen. These people are in a captive market, and nothing else will fix it.

Based on numerous previous experiences around the world over the last 75 years, rent control laws in the Bakken area of North Dakota would worsen the housing problems there, lead to chronic housing shortages and a deterioration in the quality of housing, and would create huge disincentives to build the new apartments that are so desperately needed.

That's the biggest lie you could promote on the subject.

In the cases you would cite, the laws weren't robust enough to prevent that from happening. Require strictly enforced maintenance, require a low proof of non-compliance for prosecution, and hand out steep discounts to build new housing.

Then make examples out of the gougers until honest people are the only ones left.

Nonsense. There's no "captive" market. People are free to come and free to go. If rents really are doubling, construction of new apartments will skyrocket and rents will drop. Rent control will only stop that from happening.

residents of The Manor Apartments, a 97-unit complex, received letters notifying them that the complex was under new ownership and that there would be rent increases. The monthly rent increases ranged from $475 to $750, depending on the size of the unit. A one-bedroom that previously had a rent of $422 would be $900. A two-bedroom that was $485 would become $1,100, and a three-bedroom with a $541 rent would be $1,300.

a representative from Costello Management, a South Dakota based company that manages the property, told him that "if you guys move out, we'll just fill it with oil people."

Nonsense. There's no "captive" market. People are free to come and free to go. If rents really are doubling, construction of new apartments will skyrocket and rents will drop. Rent control will only stop that from happening.

The problem is that such is not happening without the rent control. There is a lack of housing along with people that have no alternative.

What kind of houses would be created to serve these people that are not being paid, and don't have the cash to move anywhere else? None.

Nothing is forced. Tenants can move out any time, for any reason, with proper notice. Landlord/owner can raise rent at any time, with proper notice. Everything is voluntary.

Only for people that have any alternatives. In North Dakota, they don't exist unless you want to consider the idea of a Morton's Fork. They have no meaningfully different choice.

People have alternatives, they can have more roommates to share the rent, they can dine out less often, work a second job, work overtime, etc. Even fast food restaurants are paying $15 per hour, wages that would support sharing a $900 apartment with a roommate.

And how would you, or politicians or bureaucrats, have the arrogance to think you should decide by fiat what the "proper" rent should be?

seems to me that an entrepreneur would locate some vacant land in the area lease it, put in plumbing and electricity then bring in a load of trailers/manufacturer housing. The rents being charged are indicative of the market. not enough rooms to rent. Solution? not rent control but increase the supply of rooms. do it in a quick manner

it's fine just to dismiss, this situation "a la Perry" and to say that supply and demand will eventually fix everything...

but in the meantime there are some real people getting seriously squeezed here and this just before winter!!!! Ever been to ND in winter??? and the "alternatives" spoken of are hundreds of miles apart in ND.

a reasonable solution is, or would have been as it's probably too late now, rent controls with sunset clauses (expiring over time, time being an estimate of how long it would take to build new housing) and NO rent controls on new housing to make sure that new housing is built....

End result: all residents benefit from this boom...not just the landlords.

Juandos....your attitude... (basically F***K 'em) is the reason you have a crowd on Wall Street right now...Keep it up

How is temporary rent controls to smooth out the peaks and valleys in this boom "taking somebody else's money"???

Landlords of existing buildings made their investment a long time ago...so don't tell me it would be "stealing" from them....their return was good enough last year for them to keep owning their properties. And BTW I was not talking about rent reductions or even NO rent increases at all. You like to see everything as an "all or nothing world"...doesn't have to be.

Landlords in Minot right now have hit a "lottery jackpot" at the expense of just regular Joes who were just living normal lives, going to work every day...and in a matter of months their rent doubles????? and all you can think of saying is "Tough s***t"???

"All these people who are now facing higher rental rates knew this was coming for quite some time now..."(????) You think they all had crystal balls like you??? Hogwash

I would bet you dollars to donuts that if for some reason this boom went bust all of a sudden....the ones holding the bag (developers and newer landlords, etc) would get tax breaks, concessions and bailouts either directly or through their banks....but when the little guy gets royally screwed....."well that's just the free market, supply and demand don't ya know, nuttin we can do about that"....double Hogwash

And how would you, or politicians or bureaucrats, have the arrogance to think you should decide by fiat what the "proper" rent should be?

The people that are having trouble have already made the sacrifices. In most cases, there wouldn't be any room for extra people, that the terms would disallow extra people, or that the rent would just skyrocket to go beyond the extra person's help. Yes, I've seen the other side of house rentals - good and bad.

(Your justifications sound like that character in Animal House that says "All is well!", when it really isn't.)

"I would bet you dollars to donuts that if for some reason this boom went bust all of a sudden....the ones holding the bag (developers and newer landlords, etc) would get tax breaks, concessions and bailouts either directly or through their banks....but when the little guy gets royally screwed....."well that's just the free market, supply and demand don't ya know, nuttin we can do about that"....double Hogwash"...

Oh dear! You and your hog fetish comes shining through again...

Maybe your scenario of what might happen if it all goes bust like you hypothesize comes true, so what?

People can usually change the conditions of how it will happen next time at the voting booth this time...

We have something similer happening here in St. Louis county year after year and its called T.I.F.s (tax increment financing) that used to attract businesses by city, county, or state governments and are basically sizable tax breaks for business...

Meanwhile since the cost of running various government services (ie water, sewer, roads) hasn't gone down in price guess who picks up the amount that the business would've been paying?

The locals sometimes complain bitterly and in large numbers but when election time rolls around guess who's still has a job in government?

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There was nothing "dumb" about long-time homeowners in Minot suddenly being flooded out of their homes in a freak flood and then facing jacked up rents because of the increased demand for non-flooded housing. That was just bad luck.

There is a mismatch of supply and demand here. Someone is going to go without housing; who is it going to be? We seem to have two basic options: Let the free market determine who acquires a good (housing in this case), Or use government to determine who should receive housing and at what price.

It seems obvious to me which of these solutions is better. Rationing goods is only sure to fail to utilize capital efficiently, cause hurt feelings for those who aren't *chosen* and leave owners feeling the burn of loss of property income and value.

Given the proposal of the would-be economic planners, what would come of the investors in this rapidly rising market? Given the same assumptions presented in proposal to aid the current tenants: that price fluctuations of varying degrees are too much for an individual to withstand and that they should be assisted if this happens to them, even at the detriment of others, what would the situation demand in the eyes of the planner? Yet another bailout- this time of the investors left holding the bag on rapidly devalued real estate, the effect of a government action?